What are the issues facing financial advisers with clients living in European Union countries?
On January 31 2020, the UK left the EU and entered the Transitional Period.
The UK continued to benefit from the EU’s ‘passporting’ regime for financial services up to 31 December 2020, but from this date it was no longer a means for UK financial services businesses to access the EU.
In September 2016 there were about 5,500 UK authorised firms passporting their authorisations into Europe and by 31 December 2020, every one of them had a decision to make.
The expectation at the outset was this decision would not be quite so stark.
The agreement eventually finalised by the UK and the EU on 24 December 2020, known as The Trade & Cooperation Act made scant comment on financial services.
The UK is now deemed a ‘third country’ for the purposes of EU legislation. Without any special arrangements, the UK’s financial regulatory requirements will need to be deemed ‘equivalent’ to those of the EU for the UK to gain access to these markets.
The Political Declaration of October 2019 committed both sides to making their ‘best endeavours’ to carry out and finalise equivalence assessments on the other’s financial regulatory regime by the end of June 2020.
However, from then it seemed each side wanted to move forward at different speeds.
Equivalence rejected
Rishi Sunak’s March 2020 request for a swift decision on equivalence, based on the fact that the UK currently has an identical regulatory framework, was rejected by the EU.
The UK has always been eager to move things along, and as far back as July 2018 introduced the Temporary Permissions Regime for EU financial firms which were utilising passporting to access the UK.
This provided them with a three-year grace period once the transitional period ended; nothing similar was forthcoming from the EU.
Then in November 2020, Sunak put forward the UK’s own terms for financial equivalence for third states. Again, the EU made no offer of corresponding terms.
As 2020 ran its course, UK investment firms were trying to implement their contingency plans amid the negotiation struggles playing themselves out across UK and EU media.
These contingency plans could have included any of the following:
- Stop operating in any EU member state they had previously used passporting to provide services in and advise their clients located there they could no longer act for them, or
- Opt for the ‘reverse solicitation’ route available under MiFID II, or
- Obtain separate, local authorisation in each relevant state via a subsidiary or branch, or
- Establish a licensed EU affiliate. This could then be subsequently used to passport financial services across the EU.
The two latter options, while sounding the best in the long term, would only have been operable by 31 December 2020 if the firm concerned had made its decision and initiated its plans long before the cut-off date.
A large number of UK financial institutions did put plans in place and restructured their UK businesses to account for these changes.
Many used pre-existing businesses on the continent to passport into other member states, perhaps utilising ‘delegation’ as means of transferring or recruiting the minimum number of staff and activities from the UK hub.
Others may have examined where their preponderance of clients were located in the EU and chose the local regulator route.
